Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
Today we are going to be looking at supply and demand and it’s effects on the Forex market, supply and demand is the Ying and yang that moves market price.
Buyers and sellers are always at conflict and trying to find a happy medium or balance when it comes to an asset.
as markets fluctuate people are always trying to determine the causes for increases and decreases and supply and demand. There are a number of factors that could contribute to this. Positive news means increased demand and therefore lessened supply, this often results in higher prices. Negative news usually means lower demand and increased supply, often resulting in a lower price.
Supply and Demand
Supply basically means the amount of product available, while demand is the amount of product that is wanted. Think of supply and demand in the most simple of terms, from the standpoint of any market where buyers and sellers exchange goods. Let’s, for a moment, imagine that you are selling apples from your own farm at a local market. You don’t necessarily have to sell all of your apples, because, after all, you can eat them just as easily as anyone that buys them from you.
The higher price you can charge for your apples, the more willing you would be to part with them. If apples are only selling for 1 pound per bag, you might be willing to sell 5 or 6 bags. As price for apples increases you decide to make more available. Price rises all the way up to 10 pounds per bag, at which point you are more than willing to sell every last apple because you can easily take all the money you made and buy something else to eat.
The graph indicates a supply curve, and it expresses what we have discussed. This line indicates supply, which increases as prices move higher.
On the opposite end of the spectrum, we have demand. Think now from the consumers perspective. The lower the price, the higher demand will be which is the exact opposite of our supply curve.
If apples were only 1 pound per bag, we’ll we’d want to buy as many as we could because its value for money. As price increases, demand weakens because if apples are 10 pound per bag we can easily find replacement products to use instead.
Note the demand curve and how it’s the exact opposite at the starting point. these two competing forces meet in the marketplace to decide the prices that will be paid and the number of units that will change hands.
This is how price is discovered in a free market environment, the same way that prices are set on trading platforms around the world and it can be expressed in the chart shown here. The central point where the lines meet is the ideal balance of supply and demand.
The example of the apples supply and demand scenario is mirrored by that which takes place every day in the forex market. The Forex market is one of the most traded markets of them all with a massive degree of volume covering the major currencies.
Currencies are the basis for the world’s economy and when one economy wants to trade with another economy and different currencies are being used an exchange will be required.
Supply and Demand at Work
A good example of how supply and demand affects the forex market is rooted in a previous video that we looked at which is interest rates.
If the Reserve Bank of Australia for instance makes an interest rate change. This will start a butterfly effect due to the forces of supply and demand. When rates increase, rollover payments also increase. This means that investors that are holding the trade open at 5pm Eastern Time will receive a higher rate of interest than they would have previously. Buying Incentive has just been increased.Less traders will want to sell as the cost of the rollover payment has just increased.
An example of supply and demand in response to Interest Rate Increase
Price will aim to find a comfortable point, and will continue to rise until there are no more buyers willing to pay the current market price. sellers will begin to accumulate and outnumber buyers, and price will respond by moving down or retracing.
So this is where we see for instance in an uptrend we will have our typical retracements presenting in a rising market.
Due to the interest rate changes a long position is favourable, during the retracement traders are offered an opportunity to enter the market at a better price. This lower price presents a perceived value.As additional buyers enter the picture, price will move up to reflect this increased demand.
Price Will continue to rise until there are no more buyers left in terms of outweighing the sellers in the market. There is no longer value for money so to speak. This will usually result in a trend reversal or consolidation pattern. This is the process of price attempting to find its fair value… it takes place on many different time frames in every market in the world.
Today we looked at how fundamental changes can affect long-term bias in terms of supply and demand. Having a well rounded understanding of how key fundamentals affect supply and demand will help you to realise long-term value in a currency. we should always look to pit strength against weakness in terms of fundamentals and take opportunity from the momentum this provides. Please contemplate what you have learnt here today ladies and gentlemen and remember the contemplation is the key to learning.